Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Syntel (NASDAQ:SYNT)

Q4 2011 Earnings Call

February 16, 2012 10:00 am ET

Executives

Zaineb Bokhari - Head of Investor Relations

Bharat Desai - Co-Founder and Executive Chairman

Prashant Ranade - Chief Executive Officer, President and Director

Arvind S. Godbole - Chief Financial Officer, Principal Accounting Officer and Chief Information Security Officer

Rakesh Khanna - Chief Operating Officer and President of Banking & Financial Services Business Unit

Analysts

Amit Singh - Jefferies & Company, Inc., Research Division

Mayank Tandon - Needham & Company, LLC, Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Syntel Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, February 16, 2012. I will now turn the call over to Zaineb Bokhari, Syntel's Head of Investor Relations.

Zaineb Bokhari

Thank you, and good morning, everyone. Syntel's fourth quarter earnings release crossed GlobeNewswire at 8:30 a.m. today. It's also available on our website at www.syntelinc.com.

On the call with us today, we have Bharat Desai, Syntel's Chairman; Prashant Ranade, Syntel's CEO and President; Arvind Godbole, Syntel's Chief Financial Officer. and Rakesh Khanna, Syntel's Chief Operating Officer.

Before we begin, I'd like to remind you that some of the comments made on today's call and responses to questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

I will now turn the call over to Syntel's Chairman, Bharat Desai. Bharat?

Bharat Desai

Thank you, Zaineb. Good morning, everybody, and thank you for joining us today. We are pleased with our overall performance this past quarter and over the entire year. As the environment remained relatively stable during the course of 2011, we grew our annual revenues nearly 21%, consisted of an attractive level of profitability. We operate in a large and under-penetrated industry with a favorable long-term growth profile. We have a relationship model where we engage deeply with clients and focus on developing expertise in the industry and we've had a history of delivering strong financial and operating performance. It's this combination of capabilities, the culture of customer service and innovation and our nimbleness that we think positions as really well, and that's why we feel great about our prospects. Making the right investments in our future is also an important part of the equation and it's something we expect to continue.

As we begin 2012, macroeconomic conditions continue to bear watching. Even so, we would characterize demand for IT services as stable and healthy. Our pipeline continues to grow, and we expect to continue to leverage our differentiated offerings and unique market positioning to execute in the current environment. Our customers are looking for flexibility in the current environment, and they seek to manage their businesses efficiently. Syntel will be there to help our clients achieve their goals and this will help us, drive us forward as a company in the coming year and over the long term.

I would now like to turn the call over to Prashant Ranade, Syntel's Chief Executive Officer and President, to provide further details. Prashant?

Prashant Ranade

Thank you, Bharat, and welcome, everyone. Syntel's fourth quarter revenues came in at $172.4 million, increasing 3% sequentially and 19% year-over-year. Revenue growth in the quarter was broad-based with most key services, verticals and geographies improving sequentially. We saw growth across some of our largest relationships during the quarter as we continue to play an important role in helping our clients achieve their operational goals. In addition, we continue to see growth among clients 6 through to 20 outpace growth reported for the company as a whole. Arvind will provide further details on our revenue performance in his prepared remarks.

As disclosed in our 8-K filed this past Monday, we have entered an amended and restated shareholder's agreement with one of our large clients. The amended and restated shareholder's agreement modifies the right of the client to purchase Syntel's interest in our joint venture with that client. As we modified, the client has the right to purchase Syntel's interest in the joint venture during the 90-day period immediately preceding the expiration of initial term, which is February 2017 of an amended and restated Master Service Agreement, or if the MSA is extended beyond this initial term during the 90-day period immediately preceding the renewal term, which is February 2018.

Fourth quarter gross margin expanded approximately 240 basis points as compared to the third quarter levels, coming in at 42.1%. The depreciation in Indian rupee aided reported gross margins, as well as operating margins, as Arvind will elaborate later.

We continue to grow our organization based on our hiring plans, maintaining a focus on top campus hiring and we grew net headcount by 1,191 in the fourth quarter, a rise of 7% sequentially. This advanced hiring is an integral part of the investment necessary to support the long-term vision we have articulated for our company. However, as a result of this, offshore utilization for IT fell to 64% in Q4 from 70% in Q3 on a period-end basis, and to 67% from 68% on average. We expect these levels to improve as 2012 progresses.

The company's SG&A expenses decreased $5.6 million during Q4 as compared to a year ago, impacted by the depreciation in the rupee. On a sequential basis, the depreciation in the rupee also lowered SG&A, while factors such as currency-related balance sheet translations and operating costs such as compensation had a more modest impact. We are pleased with our past discipline even as we continue to add employees and invest in our facilities.

With respect to full year 2012, we are keeping an eye on macroeconomic conditions that would still characterize the overall demand environment and new business pipeline for our services are stable and healthy. Client budgets are finalizing and we have not seen a material change thus far. Based on our current view, we expect 2012 budgets to be comparable to what we saw in 2011. Despite this, we still anticipate offshoring to garner a rising share of allocated budget resources as clients explore multi-sourcing and look for additional opportunities to reduce costs.

We feel good about our market position and our business overall. We are confident that our people, domain expertise and go-to market approach will help us to continue to grow at or above market growth rates over the longer term. We expect to leverage these trends as we focus on expanding our relationship with clients 6 through 20, and as we build relationships with new customers. Our long-term view of our business and the market we participate in sets our plans for investment in people, services and infrastructure.

Investing in people also means existing employees. And I'm pleased to have appointed Rakesh Khanna as our new Chief Operating Officer earlier this year. In addition, we continue to refresh and build upon our capabilities to deliver the value add that our customers have come to expect from us.

In the coming year, we remain committed to helping our clients find answers to the challenges they face in the current environment, and we think we have the right culture and capabilities to do just that. Even as we now continue to grow, we remain flexible and nimble enough to adjust to our customers' needs.

[Audio Gap]

I thank the employees of Syntel around the world for their dedication and hard work. They are truly our most valuable asset, and we would not be where we are without them.

I would now like to turn the call over to Arvind Godbole, Syntel's Chief Financial Officer, who will discuss Syntel's financial performance. Arvind?

Arvind S. Godbole

Thanks, Prashant, and good morning. After my comments, we will open the call to questions.

Syntel's fourth quarter revenue came in at $172.4 million, up 19% from the prior year period and 3% sequentially. For the fourth quarter, Applications Outsourcing accounted for 75% of revenue, KPO was 15%, e-Business represented 8% and TeamSourcing was 2%.

From a vertical perspective, financial services contributed 56%, with health care at 19%, insurance, 12%; retail, 4%; automotive, 3% and all other accounted for just over 5%. Vertical growth was led by health care and automotive, which both grew about 10% sequentially. Retail was another strong vertical posing sequential growth of 8%.

Syntel's customer concentration levels increased slightly during the quarter. Our top 3 clients represented 52% of revenues, top 5 contributed 63% and top 10 came in at 77%. The fixed price component of our business was at 38% of revenue for the quarter.

With respect to Syntel's margin performance, our gross margin was 42.1% in the fourth quarter. This represented an increase versus 38.4% reported in the year-ago period, and a sequential improvement versus 39.8% percent in the third quarter of 2011.

Our direct cost was positively impacted by 10.9% depreciation in the Indian rupee during the quarter, which improved the gross margins by approximately 330 basis points. Aside from currency, by business segment, gross margin for Applications Outsourcing was 38.2%; KPO was 64.2%; e-Business was 39.2%; and TeamSourcing, 39%.

Moving down the income statement, our selling, general and administrative expenses were 11.4% in the fourth quarter of 2011 compared to 17.4% in the prior year period and 21.9% in the third quarter. On a dollar basis, SG&A was lower by $17 million sequentially. The absence of a onetime legal cost and the depreciation in the rupee contributed to the sequential decline in SG&A.

Aside from these factors, SG&A was essentially flat quarter-over-quarter despite the higher income as we maintained the focus on campus hiring.

Other income during the quarter increased by $0.9 million from the prior quarter, coming in at $2.5 million. The company recorded a $2.9 million loss from hedging versus $3.4 million loss in the third quarter.

Our tax rate for the fourth quarter came in at 20.8% as compared to the 17.3% posted in Q3. In the fourth quarter, the company recorded a reversal of tax reserves and additional tax provisions, resulting in a net favorable impact of $1.9 million.

Net income for the fourth quarter was $44 million or $1.05 per diluted share compared to $39.8 million or $0.71 per diluted share in the prior year period, and $26.2 million or $0.63 per diluted share in the previous quarter.

The company's balance sheet at the end of the fourth quarter of 2011 remains extremely healthy. Our total cash and short-term investments on December 31, 2011, were $320.4 million and DSO levels were at 49 days. Capital spending for this year was $38.2 million. Syntel ended the fourth quarter with a total headcount of 19,484, of which 5,551 were assigned to KPO.

Our global headcount was 2,740 on-site and 15,414 offshore for a total of 18,254. Net addition to the global headcount were 1,191.

Utilization levels at the end of the quarter were 95% on-site and 72% offshore and 75% globally. Our delivery mix at the year end was 19% on-site and 81% offshore. Voluntary attrition during the quarter was 16.4%, an improvement from the 19.1% reported last quarter. Syntel added 7 new customers in quarter 4 and 1 new Hunting License, which takes the total number of preferred partnerships to 109.

Looking forward, I would now like to provide you with the guidance for 2012. Based on our current visibility levels, Syntel expects revenue to be in the range of $720 million to $750 million, and EPS to be in the range of $3.10 to $3.35 for the full year 2012. The company currently has 58% of visibility to the lower end of the revenue range, and our guidance is based on an exchange rate assumption of INR 49.25 to the $1. We expect net operating margins will be in the 19% to 21% range and that our effective tax rate will be in the low 20s. CapEx for the year is expected to be in the range of $50 million to $55 million, including land purchases.

We will now open the call for a question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jason Kupferberg from Jefferies.

Amit Singh - Jefferies & Company, Inc., Research Division

Hi, this is Amit Singh for Jason Kupferberg. I actually just wanted to delve a little bit deeper on the onetime SG&A item. I know SG&A definitely improved a lot both on a quarter-over-quarter basis and year-over-year basis, and some of it was because of depreciation of rupee. I was just trying to get an idea of how much of the total difference is because of the rupee and because of that onetime item.

Arvind S. Godbole

We had recorded last quarter, we had onetime legal costs during quarter 3 of 2011, which is just outside of [ph] $6 million. And apart from that, it was the general view of this quarter because we had a favorable impact of the rupee depreciation. So these 2 factors, actually, the rupee did fall this quarter compared to the previous quarter.

Amit Singh - Jefferies & Company, Inc., Research Division

Okay. And just one quick question on, I guess, on the total guidance. For the next year, the revenue guidance, if I look at the midpoint, it's in mid-14%, which is I guess slightly lower growth than this year. How do you -- how does that relate to the type of demand environment that you're seeing? Are you being a little conservative?

Zaineb Bokhari

This is Zaineb. So in terms of the way we set our guidance, our guidance is visibility-based. And as Arvind mentioned in his prepared comments, we have 58% visibility currently to the low end of guidance, and it's really part of our normal practices. But as far as the demand environment overall for IT services, we would characterize that as stable and healthy and we basically feel pretty good about our business.

Operator

And our next question comes from the line of Mayank Tandon from Needham & Co.

Mayank Tandon - Needham & Company, LLC, Research Division

Bharat and Prashant, I wanted to sort of get a little bit more insight into the demand climate coming into fiscal '12 versus fiscal '11. Maybe if you could talk about the customer priorities as you enter this year versus last year, and also how about the customer cycle times relative to a year ago?

Prashant Ranade

Okay. If you look at client budgets, a lot of them are firming up clearly with the global economic uncertainty, they are cautious. But at the same time, budgets are flat to slightly up. So that is clearly positive. And in terms of the type of projects that they are looking at, in addition to normal lights-on work that constitutes about 2/3 of our business, outside that, there is clearly regulatory work, short-term ROI and specific projects related to improving customer-centricity and connect with their clients, which will help them grow their top line. So those are the key areas that they are looking at. And as Zaineb mentioned, overall, the budget is flat to up compared to last year.

Mayank Tandon - Needham & Company, LLC, Research Division

So if I break down the growth rate that you have guided to for fiscal '12, is there a way to sort of look at it secular versus cyclical versus regulatory impact, the 3 different components? How would that shake out?

Prashant Ranade

We don't break down the guidance in those terms. But if you look at our overall business, roughly 2/3 of our business falls into lights-on activity. And out of the remaining work, which is the development work, it breaks down into the 3 components which I mentioned, and it is just about 1/3, 1/3, 1/3. So that is roughly the breakdown in terms of your question.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And then just looking at what some of your larger peers have been talking about is, that we're going to be off to maybe a slower start this year versus other years given some of the uncertainty around discretionary spending. Do you expect your growth trajectory also to sort of follow that pattern with maybe sort of a slow start to 1Q and then growth picks up in the seasonally stronger second and third quarters?

Zaineb Bokhari

Mayank, this is Zaineb. We expect our revenue growth trajectory to basically follow normal patterns, where we have Q1 and Q4 seasonally slower and 2 and 3 are seasonally more strong. And we had said earlier that we hadn't really seen a kind of budget flush in Q4. We hadn't expected one coming into Q4. So you can probably expect the transition to be kind of even into the year.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And then just one more question before I get back in the queue then. Is the State Street extension. Maybe if you could talk a little bit more specifically about how that all sort of went down, and maybe if there are any price concessions involved or volume thresholds as part of the updated contract?

Prashant Ranade

Yes. As we have disclosed in our 8-K, the contract is extended through February 2017, and other terms related to pricing, as well as volume, are not disclosed. Those are confidential terms between us and our client.

Zaineb Bokhari

And, Prashant, I think we would all say that we're very pleased to we have entered this long-term agreement with a valued client. In general, we're happy with the terms and we look forward on building this relationship in the future.

Mayank Tandon - Needham & Company, LLC, Research Division

Let me ask it a different way. Are the economics of the contract different dramatically from what they have been in the past?

Prashant Ranade

Unfortunately, I can't answer that question. That is a confidential information. But as Zaineb had mentioned, clearly, the contract extension is a reflection of our longer-term relationship that has provided value to both the parties and that is the reason for a long-term extension.

Zaineb Bokhari

And to that, Mayank, I would just add that our guidance for 2012 incorporates all client agreement that we have in place. And so you should look to that when you're considering impact.

Operator

And our next question comes from the line of Joseph Foresi of Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

First question here is just, I know you talked about the growth of clients 6 through 20. Maybe you could give us any color on how you're viewing the approach to those clients internally and any target you have for the growth rates, and what you're seeing from your response in dealing with those clients?

Prashant Ranade

Right. There are 3 areas we are focused on with the rest we have shared with you. These are large enterprise unpenetrated clients, where we have the relationships and we have opportunity to get larger share of their overall revenues. And those 3 approaches are: clearly, number one, our client partner model, which is a client-facing individual. The second one is the new offerings that we have invested in, and I would request Rakesh to comment on some of those new offerings. And third area is our commitment to operational excellence, coupled with our client customers-for-life philosophies. So, Rakesh, please cover the new offerings.

Rakesh Khanna

Yes, sure. And there, I'd just like to add to what Prashant said that we continue to invest in domain-lead accelerators and also horizontal accelerators around cloud, mobility, testing and analytics.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then maybe you could talk a little bit about what assumptions are in the upper end of guidance versus the lower end of guidance, given the size of the range? Maybe you could just talk about how that relates to what you're seeing in demand or the macro environment.

Zaineb Bokhari

So, Joe, the lower end of guidance -- first of all, our overall guidance setting is based on our visibility. And as Arvind shared, 58% towards the lower end of guidance. But for the upper end, I would say that we have a view at the start of the year of how client budgets look, the number of clients that we added over the course of the past year. And then, again, it all ties back to the visibility we have on projects. So those are the factors that come into that range. And as you know, we start the year with a certain level of visibility and that just improves as the year progresses.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

So I would assume that the upper end also includes maybe a better-than-expected macro demand backdrop?

Zaineb Bokhari

I think as far as the macro economy, it's difficult to say how everything is going to shake out. But the macro economy as it stands today is what we're kind of looking at. That's the environment that we're operating in. And we're not making assumptions that there is going to be dramatic improvements. We're just going to continue to execute on our business and conduct business as normal.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And this is my last question. On the largest 2 clients, I wonder if you could talk about any growth rate trajectories or what's built into guidance as far as those 2 clients are concerned. Do you expect them to grow better than company average? Below company average? Any kind of color would be helpful.

Prashant Ranade

If you look at those 2 clients and our historic data, we have been very clear with how we have been able to grow them. If you look at the information that Arvind just shared about top 3 clients, so one 1 more than what you mentioned. So that revenue percentage actually increased slightly. And we believe a combination of new offerings, which Rakesh alluded to, our strong relationship, as well as operational performance will continue to represent strong opportunities for us with those clients.

Operator

And our next question comes from the line of Ed Caso with Wells Fargo.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

This is actually Rick Eskelsen on for Ed. My first question is just along the regulatory drivers you talked about. In health care in particular, we picked up over the past few days a potential for ICD-10 delays. I was wondering if you could comment on that, what you're seeing there and whether you think that could potentially have an impact on delaying some of the regulatory drivers in health care.

Prashant Ranade

Good question. There's some news item that came out about the deadline for ICD-9 to 10 implementation. And clearly from a regulatory issue of this magnitude, because the magnitude of the potential impact of this change is similar to Y2K. So clearly because of that, it does represent some uncertainty. But there are a couple of things we have done. One is, we have made investment in having a strong offering, coupled with the fact that in our guidance, we haven't included substantial revenues. So a combination of those 2, allows us to be ready to take advantage of that. And I think Rakesh has a comment related to ICD-10 as well.

Rakesh Khanna

Sure. Thanks, Prashant. And, Ed (sic) [Rick], to your point, in addition to the ICD-9 to 10 conversion and fewer accelerators, more people are sort of -- use our knowledge to build assets and intellectual property accelerators, which we believe will help our clients in a very significantly improved time to market, which we also believe gives us a competitive advantage. So I just wanted to add that.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

My next question is just in terms of the balance sheet translation impact, I believe that's in SG&A. So I was wondering if you could provide that number.

Zaineb Bokhari

The actual number for the quarter was $4.5 million. On a sequential basis, it was a minor change from last quarter, about 3/10 of $1 million.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Okay. And then last question, I was just wondering if you could have any comments on potential wage inflation for 2012. Peers have been out saying they expected it to be lower than last year.

Prashant Ranade

Well, as you know, after our first quarter earnings call, we comment on that, our commitment is to ensure that we have a performance-based baseline, where those who excel do better than average. And our average increments typically are based on what we see in the marketplace. So over the next 90 days, those numbers will get crystallized. And in our April call, we'll give you more color about specific percentages.

Operator

And our next question comes from the line of Brian Kinstlinger of Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

The first question is a follow-up. I think Joe asked it. If your clients 6 through 20 are going to grow faster than the company, is it safe to assume while they grow, your top 5 customers will grow slightly lower than the overall guidance?

Prashant Ranade

When the client get larger, your base is larger. So as a percentage-wise, yes, I would expect as a percentage-wise, the top 3 customers to grow slower than overall average or very close to the average. But customers 6 through 20 will grow at a higher rate, which is what we have seen over last 3 quarters as we have shared with you.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And then as I think about the KPO business as a whole, how would that -- how is that incorporated in your guidance? First of all, do you expect any pullback in revenue and seasonality in the first and second quarter based on any factors? And then in addition, should it grow faster or slower than the overall growth rate of the business you think this year?

Zaineb Bokhari

So, Brian, I think our overall business is going to follow the seasonal trends that I shared with you earlier. And as far as relative to overall growth, we don't really talk about on a segment basis guidance or outlook on a full year basis, so. But I don't know if Prashant or anyone has anything to add.

Prashant Ranade

Yes. I think what we will expect is the pattern you have seen between Q1 to Q2 to Q3 to Q4, we would expect that similar progression that we have seen over last 2 years. So that, we expect to repeat. And as far as specific segments are concerned, clearly, health care is expected to have higher growth rates than some other verticals. So those are the 2 key areas that you will see. But we expect the historic pattern to be reflected in quarterly revenues.

Brian Kinstlinger - Sidoti & Company, LLC

Two more questions. The first one, just on SG&A. There's a lot of moving parts there. We're back to the rough foreign exchange rate that we were just a couple of months ago. So maybe give us a sense for what kind of run rate you're starting at the year for SG&A, that you'll be building upon as you make investments. Is that -- are you able to provide that kind of information?

Arvind S. Godbole

In the guidance that we have given, we are expecting SG&A to be between 17% to 18% for the next year.

Brian Kinstlinger - Sidoti & Company, LLC

Sorry, one more time. I didn't hear you.

Zaineb Bokhari

17% to 18%.

Arvind S. Godbole

[indiscernible] We are expecting the SG&A to be between 17% and 18%.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And then the other question I had is about the e-Business strength. I think it was up year-over-year for the entire year, 38%. Now over the years that I've watched Syntel, it's been lumpy every now and then. It's a little bit more discretionary given it's mostly development or at least from my understanding. And so at times, we've been surprised to the upside and to the downside of that. So in light of today's economy and what's going on and a little bit of uncertainty, maybe you take us through your thoughts on the overall e-Business segment as you look through the year?

Prashant Ranade

I think there are 2 components to that. As you may remember, in Q2, we shared with you that some of the e-Business also was moving into maintenance bucket as opposed to purely being developmental work. And these are key technologies that we offer out of our strategic offering group. And because these are important technologies that are connected with integration of different applications, extracting the data and getting that golden copy of the data, which allows clients to be more responsive to their customer base. We feel good about the offerings we have in this space and would expect higher growth rate of e-Business.

Brian Kinstlinger - Sidoti & Company, LLC

So just to characterize, what you're saying is, whereas in the past, we saw some volatility sometimes to the down end of 15% sequentially because it was mostly development, you're less prone to that given there's more maintenance and some more value-added services in there. Is that correct?

Prashant Ranade

That's correct. The maintenance component is certainly higher today than in the past. But clearly, because of the nature of these technologies, there is a large development component. And as you know, that does tend to have higher volatility than the maintenance component.

Operator

And our next question comes from the line of from Tim Wojs from Robert W. Baird.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

I just had a question just on the margins, I guess. If you look back at 2010, margins were about 23%. And now in 2012, you're expecting 19% to 21% operating margins there. So you're expecting a little bit of a decline despite -- it looks like a stronger rupee and utilization levels that are really the same. So I guess my question is 2 parts: One, is the difference between those 2 rates really just the investments? And then secondly, how much of those investments are more kind of ongoing and how much might be a little bit more onetime?

Prashant Ranade

Okay. As far as the range is concerned, the operating margin, it is as you rightly said, a combination of investment we make and the impact of currency. Now, currency impact is difficult to predict. As you know, if you look at last 5 years, there has been a wide range of currency fluctuation. But when we work with our clients, we have to make sure that certain band of fluctuation, we are able to take care of by absorbing either the cost and, obviously, our focus is to offset it by operational improvement. And second area is clearly, which is a major portion of it, is investment in our business, which is infrastructure, people and their training, as well as new offerings. So clearly, our intent is to invest in the future and ensure that we ready ourselves to take care of the demand environment.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just on the employee growth. I saw employees uptick a little bit sequentially in Q4. Just how do you guys see employee growth over 2012 in correlation with the revenue growth? Should it grow about the same?

Zaineb Bokhari

Tim, we don't really provide guidance or outlook in terms of our hiring plans, et cetera. But suffice it to say, we do think that investment in people is an important part of our overall growth plans and it's something we expect to continue to do.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay. And just on other income, what I guess is a good level for us to use for other income for the year?

Zaineb Bokhari

For other income, we think a range of $20 million to $22 million is appropriate, although there is going to be some movement there because of foreign exchange moves.

Operator

And our next question comes from the line of Manish Hemrajani from Oppenheimer.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Just remind us again, how much of your work is discretionary in nature? And how do you see sales cycles being impacted in that part of the business?

Prashant Ranade

Yes. Thanks for that comment. About 2/3 of our business is lights-on and the remaining portion is developmental work. But today compared to 2008, 2009 period, the biggest differences in that discretionary work bucket is divided in roughly 3 components, as I described earlier, wholesome [ph] and risk compliance and regulatory requirements that is really not discretionary is that to be done. Second one is projects with short-term ROI, typically less than 12 months. And third bucket is clearly discretionary, where clients either can push out or stop the project. So compared to a few years back, that third bucket is much smaller today.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Would you say it's less than 10% or so?

Prashant Ranade

I think it's roughly -- first of all, the discretionary business is roughly about 1/3 of our overall business. And that 1/3 of the business divides equally. So you are right, between 10% to 13% of the business.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Okay, got it. Can you provide some insight on the environment on the U.S. especially given recent preposterous commentary coming from the region? Do you see -- do you expect to see any material change in the on-site, offshore mix as a result in the longer term?

Prashant Ranade

Actually, specific on-site, offshore percentage depends on client maturity, type of work we do and even today, we have clients, where almost 99% work is done offshore. And clearly, as clients go from initial engagement in outsourcing through complete transformation, that's the direction they're going into. So based on the environment, clearly, that is an opportunity coupled with the fact that we have taken some internal steps to increase our success rate of accruals even in the current environment. So those are the 2 actions we have taken.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Okay. And then one last one for me. How much was the FX benefit on SG&A in 4Q?

Zaineb Bokhari

So the impact on margin, on operating margins, was about 460 basis points to the operating margin line and the dollar impact was in the range of about $2 million.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Okay, got it.

Zaineb Bokhari

Just to be clear, it was 330 basis points up to gross margin, and additional 130 basis points to operating margin.

Operator

[Operator Instructions] Our next question comes from the line of Vincent Colicchio of Noble Financial.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Prashant, do you have any large application outsourcing or e-Business contracts coming up for renewal in the next couple of quarters?

Prashant Ranade

So most of -- First of all, thanks for your comments Vince. As far as large contracts, even our -- some of the large engagements break down into multiple SOWs and multiple contracts. So it is not a single large contract we have. And even timing-wise, they are factored throughout the year. So that actually makes us feel good, that it is not a single, lumpy contract that comes due at a particular time in the year.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Okay, that's helpful. And then, Arvind, I didn't hear what you said in terms of gross margin expectation for the year. What was that number?

Arvind S. Godbole

We are expecting gross margin to be between 37% and 38%.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Okay. And then capital spending outlook, did you discuss that for 2012?

Arvind S. Godbole

CapEx, we're expecting to be between $50 million and $55 million [indiscernible].

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Okay. And then one last question, maybe this is for Bharat or Prashant. Any plans for deploying the company's cash this year?

Bharat Desai

The Board of Directors reviews the cash position. One potential source of deployment of cash is any kind of acquisition that we might consider. And otherwise, the board continually reviews the cash position and then makes the decision as to what the best deployment of that could be.

Operator

And I see no further questions in the queue at this time. I would like to turn the conference back over to Syntel for any further remarks.

Prashant Ranade

No. We don't have any closing remarks. Thanks. That concludes our call. Thank you, everybody, for attending.

Zaineb Bokhari

Thank you, everyone.

Operator

This concludes Syntel's Fourth Quarter Earnings Call. A replay of today's call will be available until February 23, 2012, by dialing (855) 859-2056 and entering the passcode, which is 49904379. Thank you and have a good day, everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Syntel's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts